- An FPC Response - Consultation on withdrawal of the affordability test Recommendation
Bank of England
1. The Financial Policy Committee (‘the FPC’ or ‘the Committee’) introduced two Recommendations in 2014 to guard against a loosening in mortgage underwriting standards that could lead to a material increase in aggregate household debt and the number of highly indebted households: the ‘LTI flow limit’ which limits the number of mortgages that can be extended at loan to income (LTI) ratios at or greater than 4.5; and the ‘affordability test’ which specifies a stress interest rate for lenders when assessing prospective borrowers’ ability to repay a mortgage.
2. The FPC reviews these Recommendations regularly. In its latest review, published in the December 2021 Financial Stability Report (FSR), the Committee announced that it intended to consult on withdrawing the affordability test Recommendation. The FPC judged that, on current evidence, the LTI flow limit, without the FPC’s affordability test Recommendation, but alongside the wider assessment of affordability required by the Financial Conduct Authority’s (FCA’s) Mortgage Conduct of Business (MCOB) responsible lending rulesOpens in a new window, ought to deliver the appropriate level of resilience to the UK financial system, but in a simpler, more predictable and more proportionate way.
3. In its February 2022 Consultation Paper the FPC sought views on its proposal to withdraw the affordability test Recommendation and on the potential impact this might have on the mortgage and housing markets.